FairPoint Communications 2006 Annual Report Download - page 40

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The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Annual Report. The
following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our
business, actions of regulatory authorities and competitors and other factors which could cause actual results to differ materially from the results referred to in
the forward-looking statements, see “Item 1A.—Risk Factors” in this Annual Report.
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We are a leading provider of communications services in rural and small urban communities, offering an array of services, including local and long
distance voice, data, Internet and broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural and
small urban communities, and we are the 14th largest local telephone company in the United States, in each case based on number of access lines. We operate
in 18 states with 311,150 access line equivalents (including voice access lines and high speed data lines, or HSD, which include DSL, wireless broadband
and cable modems) in service as of December 31, 2006.
We were incorporated in February 1991 for the purpose of acquiring and operating local exchange carriers in rural markets. Since 1993, we have
acquired 35 such businesses, 31 of which we continue to own and operate. Many of our telephone companies have served their respective communities for
over 75 years. The majority of the communities we serve have fewer than 2,500 access lines. Most of our telephone companies qualify as rural local exchange
carriers under the Telecommunications Act.
Rural local exchange carriers generally are characterized by stable operating results and strong cash flow margins and operate in supportive regulatory
environments. In particular, existing state and federal regulations permit us to charge rates that enable us to recover our operating costs, plus a reasonable rate
of return on our invested capital (as determined by relevant regulatory authorities). Competition is typically limited because rural local exchange carriers
primarily serve sparsely populated rural communities with predominantly residential customers, and the cost of operations and capital investment
requirements for new entrants is high. However, in our markets, we have experienced some voice competition from cable providers and competitive local
exchange carriers. We also are subject to competition from wireless and various other technologies which may increase in the future. If competition were to
increase, the originating and terminating access revenues we receive may be reduced as a result of wireless, VoIP, or other new technology utilization. We
periodically negotiate interconnection agreements with other telecommunications providers which could ultimately result in increased competition in those
markets.
Access lines are an important element of our business. Historically, rural telephone companies have experienced consistent growth in access lines because
of positive demographic trends, insulated rural local economies and little competition. Recently, however, many rural telephone companies have experienced a
loss of access lines due to challenging economic conditions, increased competition and the introduction of DSL services (resulting in customers canceling
second lines in favor of DSL). We have not been immune to these conditions. We have been able to mitigate our access line loss somewhat through bundling
services, retention programs, continued community involvement and a variety of other focused programs.
During 2006, we completed the conversion of all access lines previously billed on the ICMS platform to the MACC Customer Master platform
(approximately 65% of total access line equivalents). The conversion of the remaining companies is expected to be completed by the middle of 2007.
Our board of directors has adopted a dividend policy that reflects our judgment that our stockholders would be better served if we distributed a
substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, dividends on
future senior
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